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Rating Action:

Moody's downgrades California Resources' CFR to B1; negative outlook

15 Sep 2015

Approximately $6.6 billion of debt affected

New York, September 15, 2015 -- Moody's Investors Service (Moody's) downgraded California Resources Corporation's (CRC) Corporate Family Rating (CFR) to B1 from Ba2, reflecting weak financial performance in the current commodity price environment. The company's senior unsecured notes were downgraded to B2 from Ba2 and its term loan and revolving credit facility was upgraded to Ba1, as a result of becoming secured under the terms of the existing credit agreement. Moody's also affirmed CRC's SGL-3 Speculative Grade Liquidity Rating. The rating outlook is negative.

"CRC's debt structure and relatively high cost position in the current low oil price environment has stressed its credit metrics," said James Wilkins, a Moody's Vice President. "It will be difficult for the company to realize meaningful debt reduction from generation of positive free cash flow."

The following summarizes the ratings actions.

California Resources Corporation

Ratings Downgraded:

....Corporate Family Rating: B1 from Ba2

....Probability of Default Rating: B1-PD from Ba2-PD

....Senior unsecured notes: B2 (LGD4) from Ba2 (LGD4)

Ratings Upgraded:

....Revolving credit facility: Ba1 (LGD2) from Ba2 (LGD4)

....Term loan: Ba1 (LGD2) from Ba2, LGD4

Ratings affirmed:

.... Speculative Grade Liquidity Rating, affirmed at SGL-3

....Outlook: Negative

RATINGS RATIONALE

The downgrade of CRC's CFR to B1 reflects its weak credit metrics for leverage, cash flow coverage, and operating and capital efficiency, that are more typical of single-B or Caa rated peers. CRC's relatively high cost production (production, SG&A and interest costs totaled $31.71 per boe for the second quarter 2015) and weak commodity prices that Moody's does not expect to improve materially in 2016, leaves CRC will a limited ability to generate positive free cash flow and reduce balance sheet debt. Given CRC's high cost structure, we expect to see leveraged cash margins between $8-$11 per boe over the next 12 to 18 months. The company has relatively little of its 2016 production hedged (just 5,000 bpd or less than 5%). The company has stated that it plans to monetize assets and will potentially consider other transactions that would allow it to reduce balance sheet debt to $5 billion by year-end 2016. Even so, its leverage and cash flow metrics will be weak for the B1 CFR.

In 2015, CRC has limited its capital expenditures to levels that can be funded by internally generated cash flow. The company has reduced the number of rigs working to three in January 2015 from a peak of 27 in October 2014. Moody's believes this level of spending and drilling activity could lead to only a small decline in production in 2015 and 2016 compared to 2014. In addition, with the reinvestment of its cash flow, there is little ability to reduce the company's debt burden using free cash flow.

CRC's B1 CFR is supported by the company's large scale and legacy production as one of the largest operators in California. At year-end 2014, the company reported roughly 550 million boe of proved developed reserves and during the second quarter 2015 reported 161,000 boe of production per day. This scale is larger than other oil-focused B1-rated companies. The quality of CRC's reserve base is another credit positive. CRC's production is mature with a well-defined and shallow decline rate. The reserves are well-diversified and have a reserve life index that is longer than most peers.

CRC's SGL-3 Speculative Grade Liquidity Rating reflects Moody's expectation the company will have adequate liquidity through 2016 supported by its funds from operations, modest cash balances ($37 million as of June 30, 2015) and availability under its revolving credit facility due 2019. The credit facility agreement covering the term loan and revolving credit facility calls for the loans to be secured when the CFR is Ba3 or lower. As a result of the CFR downgrade to B1, the revolving credit facility loans are subject to a borrowing base. Moody's expects that the borrowing base will be sufficient for CRC to have access to the full $1.25 billion in commitments, but such borrowing base is a function of crude oil and natural gas commodity prices. The company had $590 million of borrowings and $27 million of letters of credit as of June 30, 2015, and will remain reliant on its revolver. CRC expects to limit capital spending such that its free cash flow is breakeven or positive. It does not have near-term debt maturities. The company does not pay material dividends in its common stock.

In February 2015, the credit facility was amended to relax its financial covenants. In return, a liquidity requirement was added that effectively reduces availability under the revolving credit facility to $1.25 billion and the rating trigger was modified so that a Ba3 CFR would give the lenders an annual borrowing base to govern availability, as well as collateral security. Moody's expects the company will remain in compliance with the two financial covenants in the revolver -- a maximum debt to EBITDAX and minimum EBITDAX to interest expense.

The term loan and revolving credit facility are rated three notches above the B1 CFR to reflect their secured nature and priority of claim on assets over unsecured debt (including $5 billion of senior notes) in accordance with Moody's Loss-Given-Default rating methodology. The senior unsecured notes are now rated B2, one notch below the B1 CFR, as a result of being contractually subordinated in claim to the secured debt.

The negative outlook reflects uncertainty in CRC's ability to improve its cash flow and leverage metrics to levels supportive of the B1 CFR. The ratings could be downgraded if retained cash flow to debt is not expected to increase above 10% on a sustained basis, CRC does not continue to generate positive free cash flow or CRC does not improve its leverage. It is unlikely that the ratings will be upgraded given current cash flow and leverage expectations. To be considered for an upgrade, the ratio of retained cash flow to debt should be projected to be sustained above 20%.

The principal methodology used in these ratings was Global Independent Exploration and Production Industry published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

California Resources Corporation, headquartered in Los Angeles, is an independent, exploration and production company with operations exclusively in California. It was spun out of Occidental Petroleum in November 2014.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

James Wilkins
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades California Resources' CFR to B1; negative outlook
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